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Pension reform: great opportunities, but real dangers

Government and Regulator should act now while ‘horse is still in the stable’

The pension reforms being introduced in the UK this April will bring about inevitable mis-selling claims warns Scottish Friendly. The mutual believes more needs to be done to ensure that pensioners and their retirement savings are protected.

Despite the pension legislation offering individuals more control and flexibility around how to manage their retirement funding, Scottish Friendly is concerned that the UK will see large numbers of pensioners targeted by salespeople bent on separating them from their lifetime savings, with particular concern being the buy-to-let market.

Neil Lovatt, product director at Scottish Friendly, commented:

There are great opportunities in these reforms, but also real dangers. A mis-selling scandal of some description is almost inevitable as pensioners get targeted and exploited. The biggest concern is that pension assets will be used and abused outside the confines of the protection currently afforded by the regulated financial services sector and individual advice.

One area of particular concern must be the buy-to-let market. In 2004 the Government proposed to enable the purchase of residential property within a SIPP, which caused an unseemly tidal wave of marketing by the buy-to-let sector. Fortunately, just as the great transfer of assets in pensions to property was about to get underway the Government had the courage to U-turn on its proposal.

This time there won’t be any such U-turn. The danger is that people with substantial pension funds will be encouraged to withdraw them, probably on poor tax terms, to invest in a buy-to-let property or worse put down a substantial deposit on a mortgaged buy-to-let property.

Whilst superficially tempting for many to invest in a ‘real’ asset, the simple fact is investing in such a way will inevitably leave some pensioners high and dry. With such volatility in the market and the potential to be caught in property bubbles there will be winners and losers out of this, and it’s the losers which we will view as having been mis-sold.

Short of a politically unacceptable U-turn on the policy, we need the FCA to take a more definitive stance to present strong negative risk warnings about using pension benefits for unregulated investments or doing so without detailed personal advice from a qualified financial adviser. Its predecessor, the Financial Services Authority did so in the past with precipice bonds and the structured capital at risk product regulations (SCAPRS), albeit after the horse had bolted.

We need strong and brave action from the FCA to close the gate whilst the horse is still in the stable. Doing so now can help to protect those in retirement so they can safely enjoy the freedom and flexibility the reforms were designed to allow.